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Friday, December 12, 2014

Consumer Update

In the wildly exciting life that I live, I do my level best to keep track of demographic and consumer trends. Not quite two weeks ago, the Federal Reserve released new figures on consumer debt levels in the U.S. and I have decided to share them with you plus add a few comments.

Top line results were as follows:

Average Household Credit Card Debt--$15,608
Average Mortgage Debt--$154,847
Average Student Loan Debt--$32,397

Let us take a quick look at each category:

Credit Card Debt--Actually, if you include ALL households in the credit card debt universe, the average balance is about $7,200. Many, such as you and I, pay off their credit card balances each month. So, the $15.6k is for those who are carrying installment debt with credit cards. Some 47% use credit cards almost daily but have no balance and pay zero interest on them. Minimum payments, then, for those who have credit card debt, are over $300 per month.

There is a statistic that is even scarier than those above. When the Great Recession hit in 2008-2009, people saw that average credit card balances were declining. My knee jerk reaction was that scared citizens were cleaning up their personal balance sheets and paying down debt. Undoubtedly, many were. The real truth as we look at it several years later is that the decline in indebtedness was due more to defaults rather than restraints on spending.

Average Mortgage Debt--not a great deal to say here except that those who were underwater (mortgage balance higher than their home’s value) have often worked their way in to the black. The government agencies Fannie Mae and Freddie Mac announced this past week that they are now writing 3% downpayment mortgages again. This time, they say that documentation must be much tighter than in 2006-2008. A shift in policy such as this makes me nervous. Why not stick to the Canadian ironclad rule of 20% down or the mortgage will not be written?

Student Loan Debt--this is the fastest growing area of US debt. The average graduate starting out in the world has $32,400 in debt. Alarmingly, despite repeated media warnings, this total is up 9.6% from the prior year. And, approximately 32% of those who have student loans are late or have defaulted on them. Bankruptcy? Forget about it! If you declare bankruptcy congress has passed laws insuring that you must pay back the loans. Some will be 50 before they pay their loans off. I do not feel that it is the role of government to protect people from themselves yet given the age of people signing long term agreements more explanation and discussion is needed in my opinion.

Also, many of the loans are taken out by youngsters who take out loans to go to a community college. They borrow $16,000 and then fail out or drop out. Next stop is a minimum wage job at a 7-Eleven or fellow traveler. The debt will likely never be paid off and a 20 year old will have a financial millstone around his or her neck for life. Total student debt now stands at over $1.1 trillion.

So, where does this leave us? Some 70% of the US economy is (sadly) consumer driven.  Were everyone to pull in their horns all at once, the economy would be headed toward another Great Recession. There is a big buzz lately as the cost of a barrel of oil has dropped from $107 to around $60, as I write. The average American has approximately $100 per month extra to spend as long as oil stays low. Yet, if you look at Detroit sales in the last few months, SUV sales are up smartly. When oil inevitably goes up, they will be in a tighter spot than now. So, will people use this oil windfall to pay down some debt and re-liquify? Too good to be true. Also, historically, a big drop in the price of oil usually indicates a weakening economy. So, is the low cost at the pump merely a prelude of a weakening global economy?

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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